Trump Redraws the Map of Global Trade

Donald Trump’s arrival at the White House with a protectionist trade strategy and expansionary fiscal policy opens the door to a new map of global trade. Promises of public spending portend inflationary pressures and interest-rate hikes that will reverberate across the globe.

Trump redibuja el mapa del comercio mundial

Following a period of relative stability, the global economy is expected to see a slight recovery that will not be free from uncertainties, including the possible political, geostrategic, social, diplomatic, and environmental consequences of Donald Trump’s presidency. The new US president has taken the reins of a country with close to full employment and an inflation rate above 2%, which is certain to translate into interest-rate hikes. The centerpiece of Trump’s economic program is a major fiscal stimulus that will take two forms: increased public spending—including a $1 trillion infrastructure plan and a larger defense budget—and tax cuts for businesses and upper- and middle-income households. The US economy has been in a growth cycle for seven years, longer than the historical average. Although it is too early to determine the impact of Trump’s expansionary fiscal policy, forecasts suggest that growth could increase to 2.5%.

A highly expansionary fiscal policy, an unemployment rate of less than 5%, rising wages and oil prices, and greater economic growth will cause inflationary pressures that will prompt the Federal Reserve to raise interest rates more aggressively than initially planned. Forecasts suggest that three interest-rate increases could take place this year—to a total of 1.5%—but fail to consider the possibility of larger hikes aimed at keeping inflation at just over 2%.


A step backwards in international relations

All signs point to an increase in unilateralism. The major trade-liberalization process that began at the turn of the millennium will not be replicated in the coming years; in fact, steps may even be taken to reverse it. The markets apparently do not share these fears. The stock markets have interpreted the measures announced by the new president as being positive in the short term for a substantial portion of US industry, especially sectors such as banking, oil and gas, pharmaceuticals, and construction.

After Trump’s victory, the US dollar rose in value. The currency that initially took the biggest hit was the Mexican peso, whereas the Russian ruble escaped unscathed. Although many currencies have recovered following these initial losses, rising interest rates in the US will strengthen the dollar in the medium term. This is a source of concern for many Latin American countries, including Mexico, which also faces larger risks.

The big problem is the uncertainty surrounding the North American Free Trade Agreement and the establishment of tariffs or quotas on exports. Moody’s estimates that a 20% tariff on imports could cause the peso to lose 25% of its value, the largest drop since the aftermath of the 1985 Plaza Accord between the United States, Japan and the largest European economies. According to the credit-rating agency, economies with currencies pegged to the dollar—such as Saudi Arabia and Hong Kong—would be forced to make internal adjustments. A tariff hike would also affect countries that hold large amounts of debt in dollars (such as Jamaica and Venezuela) and would even have an impact on larger economies such as China. More generally, it would lead to a reconfiguration of global supply chains. Indeed, such a move would have consequences not only for countries that rely on exports, but for trade generally across the globe.

The centerpiece of the economic program is a major fiscal stimulus that will take two forms: increased public spending and tax cuts for businesses and upper- and middle-income households.

Taxing remittances

We have seen the first inkling of Trump’s protectionist strategy in the decision by the US to withdraw from the Trans-Pacific Partnership—an agreement that had not yet entered into force—and not to enter the Transatlantic Trade and Investment Partnership, which was being negotiated with the European Union.

Another possibility—one that would have grave consequences for many countries—is that Trump might keep his promise to tax remittances sent by migrant workers to their countries of origin. These remittances are vital to many Latin American countries; in Mexico, which receives around $25 billion in remittances each year, they are the second-largest source of income for the country. The remittance tax floated by the US president could substantially change the situation of the Mexican economy.

In Europe, Trump’s arrival has coincided with an economic recovery that has yet to deliver strong growth rates. Forecasts vary by country. In Spain, growth will slow down slightly, while Greece shows signs of returning to positive territory. Germany could see growth of around 1.5%; France slightly less. Meanwhile, the United Kingdom could start to feel the effects of a Brexit slowdown.

It is important to note that the European Central Bank has extended its stimulus policy—a decision that will keep things calm and hold interest rates down. Europe is therefore in a favorable position. However, after the deflation of 2016, inflation has shot up and there is a risk that it will exceed 2%.


Improvements in emerging economies

Elsewhere in the world, emerging economies are seeing slight improvements, with a few exceptions. Latin America was in recession in 2016, but in 2017 the region could grow by 1%, depending on the performance of Brazil and Mexico, which together account for 40% of the region’s GDP. Interestingly, 2015 and 2016 were the first two consecutive years of recession for Brazil since 1930, although this situation could change, depending on political and fiscal developments. For Mexico, developments in the country’s political and economic relationship with the US will play a key role. Meanwhile, other regions are stabilizing or improving, thanks mainly to the recovery of prices for raw materials and oil.

As for the largest emerging countries, China continues to make a soft landing and is expected to post 6% growth in 2018, India is accelerating, and Russia, fueled by rising oil prices, is once again showing positive growth.

The global epicenter of economic activity will shift to the Pacific. This process is unstoppable because China will demand greater recognition as its economic importance increases.

The Pacific: epicenter of economic activity

Regardless of Trump’s policies, the global epicenter of economic activity—located in the North Atlantic region since the 16th century—will be shifting to the Pacific, where most of the global GDP is “cooked” and the most dynamic economies are concentrated. This process is unstoppable, especially because China will demand greater recognition as its economic importance increases. The Chinese government’s strategy is to engineer a gradual rise, i.e. to recover the position that China never should have lost in the 14th century, when the country began its internal decline. China is here to stay, and it wants to ensure its political, economic, and military dominance.

Europe, meanwhile, will be what it wants to be, although the continent has no long-term plan. Today, Europe is home to 7% of the world population, 25% of global GDP, and over 50% of worldwide social spending. These percentages do not add up and must eventually be adjusted. Finally, Europe will be obliged to “punish” the UK—making sure that Brexit is not painless—in order to discourage future copycats.

Another reality is Trump’s “honeymoon” with Russian president Vladimir Putin on issues such as the war in Syria. It is hard to imagine, however, that this friendliness will last when it comes to certain issues—like Iran—on which the US and Russia have very different approaches. Meanwhile, the US government’s support for Israel will become even more unconditional. Trump has even suggested transferring the US embassy to Jerusalem, a move sure to provoke not only the Palestinians but the entire Arab world. It is not clear that US support in the Middle East will remain as active as it has been in the past. Oil—that crucial geostrategic and geopolitical component—will fade in importance now that more than half of the oil consumed by the US is self-produced. The US is far from energy-independent, but it is less dependent than before and will gradually reduce its dependence even further through fracking.


© IE Insights.